Example 1Problem: Let’s say that a firm’s total revenue is $180,000. Using the explicit and implicit costs from the business example at the bottom of section 1, what are the firm’s accounting and economic profits?

From a financial point of view, assuming no changes in costs and revenue, should the firm in the last example continue to operate? The firm reaps a positive accounting profit of $10,000. Thus, the firm has a positive cash flow. However, the negative economic profit indicates that if the owner had put her/his time and capital in the alternative activity, (s)he would have earned $15,000 more. Therefore, from a financial point of view, assuming no change in the future costs and revenue, it is better for the owner to discontinue the business and pursue the alternate activity.